Ratios

Formula

Target

Meaning

Gross Profit Margin %

Gross Profit % = Sales - COGS / Sales *100

>23

Measures pricing power and cost control. A declining percentage may indicate rising costs, increased discounts, or stock losses.

Net Operating Profit %

Net Profit before taxes / Sales *100

8 - 12%

Measures operating profitability. If Net Operating Profit % is significantly higher than Net Profit %, non-operating expenses may be having a significant impact on profitability.

Net Profit %

(Net Profit before taxes + Non Operating) / Sales x 100

>5

Measures the percentage of sales remaining as profit after operating and non-operating expenses. A declining percentage may indicate that operating expenses and income require attention.

EBITDA

Earnings Before Interest, Taxes, Depreciation and Amortisation

N/A (track as absolute; aim for positive growth)

Measures core earnings performance and is particularly useful for businesses with significant fixed assets.Core earnings power, useful for retail with high fixed assets like stores.

Return on Equity % (RoE).

Annual net income after taxes / Average Equity

Or RoE=Profitability*Efficiency*Leverage

>15%

Measures the amount of net income generated for each unit of shareholders' equity. Changes in RoE should be analysed to determine whether they are driven by changes in assets, liabilities, or net profit..

Return on capital employed  (ROCE)

EBIT / Capital Employed (equity plus non-current liabilities

>10%

ROCE reflects a company's ability to earn a return on all of the capital it employs.

There is no set benchmark, market commentators argue that ROCE should be higher than inflation, or up to double the interest rate.

A higher ROCE means that a company will have more money to invest back into the business and help it achieve higher earnings per share.

A lower ROCE may indicate that the company is not employing its capital effectively.

Gross Margin Return on Inventory (GMROI)

Gross Profit / Inventory

>3

Measures the gross margin returned for each dollar invested in inventory. (Higher is better)

Return on Assets % (ROA)

(Asset efficiency)

Profit Before Taxes / Total Assets

>5

Measures how effectively the business uses its assets to generate profit.

It is a common ratio used to compare how well you performed in relationship to your peers in your industry. (The larger the better)

Interest Coverage Ratio (ICR)

EBIT / Interest Expense

>3

Measures the business's ability to meet its interest-payment obligations. For example, a ratio of 2 means the business generates sufficient EBIT to cover its interest expense twice.

Short Term Liquidity Ratios

Liquidity ratios measure the business's ability to meet its short-term obligations.

Current Ratio

(Working capital ratio)

Current Assets/Current Liabilities

>=2

Measures the business's ability to meet current debt obligations using its current assets.

Acceptable value: 2 or more (Higher is better; 2.0 is average.)

A ratio of 2 means there are approximately R2.00 in current assets for every R1.00 of current liabilities.

Quick Ratio

(Acid-test ratio)

Cash+Accounts Receivable / Current liabilities

Or

(Total Current Assets -Total Inventory) / Total Current Liabilities

>0.5

The Quick Ratio provides a more conservative measure of liquidity because it excludes inventory from current assets.

Ratios between 0.5 and 1 are considered satisfactory.  (The larger, the better)

There is R x.xx in quick assets (liquid) to pay every R1.00 in current liabilities.

Cash Ratio

Cash + Cash Equivalents / Current Liabilities

>=0.02

Measures liquidity using only cash and cash equivalents. This is an ultra-conservative measure of short-term liquidity..

Financial Sustainability

Debt-to-Equity Ratio

Total liabilities/ Total Owners equity

<=1.5

(0.43 - 1)

Measures the amount of funding provided by creditors compared with the funding provided by owners.

•Lower ratios indicate less reliance on debt.

•The source benchmark indicates an optimum range of approximately 0.43–1.0.

•A ratio above 1 means creditors have provided more funding than owners.

The appropriate level varies depending on the type of business and management's approach to financial risk.

Debt Ratio

(Debt to Assets Ratio)

Total Liabilities / Total Assets

<=0.6

(0.3-0.5)

Measures the percentage of assets financed through debt or other liabilities.

Fixed Assets to Net Worth

Fixed Assets / Net worth (equity)

<=1.25

Measures the portion of the company's net worth invested in fixed assets such as property, plant and equipment.

A high ratio indicates that a significant portion of the company's funds is tied up in fixed assets and may therefore be unavailable as working capital.

Capitalization Ratio

Long-term Debt / (Long-term Debt + Equity)

<35

Measures the proportion of long-term capital provided through debt.

It provides an indication of the extent to which the business uses long-term debt to finance its operations and capital expenditure. capital spending.

Current liability ratio

Non-current liabilities / Total liabilities

Working Capital

Total Current Assets - Total Current Liabilities

>0

Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash.

Lenders use it to evaluate a company’s ability to weather hard times

Z-Score

(1.2 * (Current Assets - Current Liabilities)/Total Assets) + (1.4 * Retained Earnings/Total Assets) + (3.3 * EBIT/Total Assets) + (0.6 * Market Value Equity/Book Value Liabilities) + (1.0 * Sales/Total Assets)

>2.99

A very accurate guide to your company’s financial solvency. A Z-Score of 1.81 or below means you are headed for bankruptcy. Conversely, a Z-Score of 2.99 means your company is sound.

Working Capital Analysis

1 Net Working Capital (NWC) - R.c

Current Assets - Current Liabilities

Positive; monitor as R value

A company can be endowed with assets and profitability but short of liquidity if its assets cannot readily be converted into cash. Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses.

Sources of working capital are (1) net income, (2) long-term loans, (3) sale of capital assets, and (4) injection of funds by stockholders. Ample working capital allows management to take advantage of unexpected opportunities, and to qualify for bank loans and favourable trade credit terms. In the normal trade cycle of a company, working capital equals working assets. Also called net current assets.

2 Inventories, thousand R.c

Inventory Value

Working capital sufficiency (1-2), thousand R.c

Current Assets - Current Liabilities - Inventory

>0

Liquidity without inventory. Key for perishable/low-turnover retail.

Inventory to working capital ratio (2:1)

Inventory / NWC

<=1

Inventory burden on capital. High signals overstock risk.

Net Sales to Working Capital. (Working Capital Turnover)

Net Sales / Net Working Capital

5-10x (upward trend good)

The relationship between Net Sales and Working Capital is a measurement of the efficiency in the way working capital is being used by the business. It shows how working capital is supporting sales. A spike in the ratio could be caused by a decision to grant more credit to customers in order to encourage more sales, while a dip could signal the reverse. A spike might also be triggered by a decision to keep more inventory on hand in order to more easily fulfil customer orders.

Again, this ratio must be compared to others in your industry to be meaningful. In general, a low ratio may indicate an inefficient use of working capital; that is, you could be doing more with your resources, such as investing in equipment. A high ratio can be dangerous, since a drop in sales, which causes a serious cash shortage, could leave your company vulnerable to creditors.

Considerations

A working capital turnover that is too high can be misleading. On the surface, it appears that you are operating at a very high efficiency, but in reality, your working capital level might be dangerously low. Very low working capital can possibly cause you to run out of money to fund your business.

Business Activity (Turnover Ratios)

Fixed Asset Turnover

Net Sales / Fixed Assets

>5-8x (higher better)

A measure of the sales productivity and utilization of plant and equipment.

The higher the ratio, the better, because a high ratio indicates the business has less money tied up in fixed assets for each unit of currency of sales revenue. A declining ratio may indicate that the business is over-invested in plant, equipment, or other fixed assets.

Measures the amount of sales a business generates for every dollar invested in fixed assets

Total Asset Turnover

Net Sales / Total Assets

>1.5-2.5x

Measures the amount of sales a business generates for every dollar invested in total assets.

Capital Turnover

Net Sales / (Equity + Long-Term Debt)

>2-3x

Capital productivity.

Inventory Turnover Ratio

COGS / Average Total Inventory

4-10x (fashion 6-12x; furniture 2-5x)

The Inventory Turnover Ratio measures the number of times inventory “turned over”. It is a good indication of purchasing and production efficiency

On average, the inventory turns over x times a year

Inventory Days On Hand

365 days / Inventory Turnover ratio

30-90 days (lower for fast-moving goods)

On average, the inventory turns over every x days.

Accounts Receivable Turnover Ratio (Debtor's turnover ratio)

Net Credit Sales / Average Accounts Receivable  during a given period.

>8-12x

The receivables turnover ratio is an activity ratio measuring how efficiently a firm uses its assets. Receivables turnover ratio can be calculated by dividing the net value of credit sales during a given period by the average accounts receivable during the same period.

Accounts Receivable Days on Hand

365/ (Net Credit Sales / Ave. Acc. Receivable)

30-45 days

A measure of the average length of time it takes the firm to collect the sales made on credit

Accounts Payable Turnover ratio

Total Purchases (cost Of sales) / Ave. Acc. Payable

6-10x

Payment speed to suppliers. Accounts payable turnover ratio is calculated by taking the total purchases made from suppliers, or cost of sales, and dividing it by the average accounts payable amount during the same period.

Accounts Payable Days

365/(Tot. Purchases / Ave Acc. Payable)

30-60 days

Days to pay suppliers. Extend for better cash flow without penalties.

Cash Cycle

(Trading Cycle)

Accounts Receivable Days + Inventory Days – Accounts Payable Days = Cash Cycle

30-60 days (lower better)

This means it takes approximately X days from the time they purchase inventory, complete the sale of the inventory and collect on the sale of the inventory. You could say they need to have X days of operating expenses in reserve or available to cover the cash cycle.

Breakeven

Operating Costs / GP% or Fixed Costs / (Fixed Costs + Profit) *100

Track as sales threshold

Minimum sales to cover costs. Vital for retail planning.

Safety Margin

(Sales - Breakeven Sales) / Sales *100

>20-30%

What % of sales can be 'lost' before the business will enter a loss position.

Other

Sales Per Employee

Net Sales / Number of Employees

Labor productivity.

Profit per Employee

Net Profit / Number of Employees

Profit efficiency per worker.